Repo rate , the one at which RBI lends to banks will now be 6.50%, reverse repo, the rate banks receive for depositing funds with the central bank will be at 5.50%. Cash reserve ratio, the proportion of deposits that banks have to keep aside, was left untouched at 6%.

RBI also raised March inflation forecast to 7% from 5.5% and warned that higher food prices could become entrenched if steps to boost output are not taken.

The Reserve Bank, however, projected GDP growth at 8.5 per cent with an upside bias. It also warned that inflation is a matter of concern and revised its projection for FY'11 to 7 per cent from 5.5 per cent earlier.

These initiatives, the RBI said will "rein in rising inflationary expectations, which may be aggravated by the structural and transitory nature of food price increases."

The apex bank further said its monetary action was aimed at reining in rising inflationary expectations, while at the same time being moderate enough not to disrupt growth.

It also aims to contain the spill-over from rising food and fuel prices to generalised inflation and continue to provide comfort to banks' liquidity management operations, the RBI said.

Prime Minister Manmohan Singh’s government is being blamed by Opposition for failing to save the majority from price increases, where wholesale price index (WPI) in December rose to 8.43% and October gains were raised to 9.12%. Food prices are advancing at more than 15%. Bajaj, Maruti Suzuki, Tata Steel , Hindalco have all increased prices due to soaring input costs.

Profit margins for companies such as battery-maker Exide Industries have shrunk.

Subbarao raised policy rates six times in 2010 by 25 basis points each, but that turned out to be too little. In contrast, his predecessor YV Reddy often shocked the markets. It has been the most aggressive major central bank in Asia this year.

Industrial output fell to an 18-month low in November with production growing at a slow 2.7 percent.